No “occurrence” because the damages were the ordinary consequence of subcontractor’s defective window installation.

An Illinois federal district court, applying Illinois law, held that insurers have no duty to cover a subcontractor’s settlement with a condominium association relating to property damage caused by subcontractor’s faulty window and glazing services.

Metro North, the governing body of a condominium building in Chicago, filed suit against a number of its contractors and subcontractors for defective construction that caused various issues, including water infiltration.  Subcontractors included CSC Construction, Inc. and CSC Glass, Inc. (collectively “the CSC Entities”).  Metro North alleged that the CSC Entities provided window and glazing services and that, due to CSC Entities’ “construction errors and omissions,” serious water infiltrations issues arose.  Metro North claimed that the water infiltration caused damage to the building and the unit owners’ personal property, in breach of the implied warranty of habitability (“BIWH”).  Metro North and the CSC Entities entered into a settlement agreement in which the CSC Entities agreed to pay Metro North $700,000, to be satisfied solely through the assignment of the CSC Entities rights under any insurance policy.

Allied Property & Casualty Insurance Company and AMCO Insurance Company (collectively “Insurers”) issued commercial general liability (“CGL”) policies to CSC Glass during the relevant time period.  Insurers sought a declaration that there is no coverage under the policies for the settlement.

First, Insurers argued that “the damages Metro North claimed [against the CSC Entities] are not recoverable for BIWH, so the settlement could not have been entered into in reasonable anticipation of liability.”  The district court found that “damages for BIWH is ‘the cost of correcting the defective conditions’” or “the amount by which the defects have reduced the value of the property should be the measure of damages.”  The district court agreed with Insurers:  “The damages covered by the CSC entities’ settlement agreement with Metro North were not for the costs of repairing defects (which the policies undisputedly do not cover), or for the diminution in the value of the building ….”  The court’s reasoning was that the settlement related to damages which were not recoverable under a BIWH theory.

Second, Insurers argued that, even if the damages Metro North sought are recoverable in a BIWH action, the damages to the property (other than the unit owners’ personal property) were not caused by an “occurrence” because “they were merely the natural and ordinary consequence of faulty workmanship.”  The district court found that a CGL policy only covers damage caused by an ‘occurrence,’ and they do not cover the natural and ordinary consequences of defective workmanship.  Thus, the district court again agreed with Insurers:  “When a subcontractor who installs windows performs defective work, the natural and ordinary consequence is water infiltration that will damage the rest of the building.  There is no accident, so there is no occurrence, so there is no coverage.”

Finally, as to that portion of the settlement that related to damage to the unit owners’ personal property, the district court held that, under the Illinois Condominium Property Act, Metro North had no standing to assert those claims.  Consequently, Insurers had no obligation to cover any portion of Metro North’s settlement with the CSC Entities.  Allied Prop. & Cas. Ins. Co. v. Metro North Condo. Assoc., No. 1:15-cv-03925 (N.D. Ill. Mar. 31, 2016).